Student Loan Interest Rates - 2013 Edition

As the clock tickets down to a potential July 1 doubling of the interest rate on Student Loans these seems to be more in the news than I can remember (at least since last summer when we went through this song and dance.)

From what I can tell, there seem to be two competing plans on the table,

I'm not sure which plan I think is more "fair" but given the unique qualities of Student Loans as a debt instrument (specifically that it is essentially uncollateralized [how do you repossess an education?] but it is non-dischargeable in bankruptcy) it seems to me that an overall lower rate is certainly justified. Fixed Rate debt typically comes at a premium to variable rate debt to account for a potential rise in interest rates that may cause the fixed rate to be "underwater." But, given that interest rates have been at historic lows and at some point they're going to have to rise, the cap is certainly attractive, even if in the interim the rate is variable.

Taking the next step, the fact that current tax codes allow for deduction of Student Loan Interest plays into this and then of course there remains that nebulous goal of "societal improvement" which is influenced by major selection and kind of outside of the scope of the discussion I'm trying to get at...

Just wanted to get some input from the Box on this issue as it is truly something I'm undecided on...

There are three democratic plans floating around, from the White House, Gillibrand, and Warren. The Gillibrand plan is unique in that it allows existing debtors to refinance at 4% (I would slaughter puppies and kittens to get this bill to pass). The Warren plan would tie the interest rate to the overnight lending rate (which is frankly pretty silly).

The tax code treatment of student loan interest has some interesting features. On the positive side, it's an above the line deduction, so even if you don't itemize, you can still take advantage of it. On the negative side it is capped at a paltry $2500 a year and phases out on a fairly aggressive schedule.

There are three democratic plans floating around, from the White House, Gillibrand, and Warren. The Gillibrand plan is unique in that it allows existing debtors to refinance at 4% (I would slaughter puppies and kittens to get this ball to pass). The Warren plan would tie the interest rate to the overnight lending rate (which is frankly pretty silly).

The tax code treatment of student loan interest has some interesting features. On the positive side, it's an above the line deduction, so even if you don't itemize, you can still take advantage of it. On the negative side it is capped at a paltry $2500 a year and phases out on a fairly aggressive schedule.

There are a few different considerations that drive my thinking on this issue. First, underlying a lot of the discussion is the implicit notion that the program as a whole should "pay for itself". When you unpack this it means that students who don't default should pay for students who do. The alternative is that the taxpayer at large pay for the students who default, and the "pay for itself" should be calculated on a student by student basis.

Under the first view, the current interest rate is rather low, and you probably want something more like what I had to pay (6-9%). However, that opens up the question of underwriting. If the government is going to act as a revenue neutral lender, shouldn't it underwrite like every other lender? Right now it actually sets rates in a way that I suspect are the opposite of what good underwriting would suggest (e.g. medical school GradPLUS loans are at a higher interest rate than undergraduate Stafford loans). Under the second view, the rate should be set at either the 10 year treasury note, or the (synthetic) 25 year treasury rate, depending on which repayment plan is selected plus a few basis points for paperwork. At the moment that's 2.72% and ~3% respectively. Personally, I prefer the second way of thinking.

The second major consideration is not so much about the interest rate, as the amount available to be borrowed and the very few conditions that are put on accessing that money. In my opinion this policy of nearly unlimited lending with nearly no conditions has helped cause enormous higher education expense inflation (along with, to be fair, Baumol's cost disease) and lead to the rise of a continuum of shady institutions from full on for-profit scams, to non-profits that are a waste of everyone's time but pay huge salaries to hundreds of deanlets. It has also lead to degree inflation, which is a problem all its own.

Finally, and this doesn't really point in any particular direction, I think it is instructive to compare and contrast policy makers programs and attitudes towards student loans and mortgages. Right now every organ of government (Congress, President, Fed, and many courts) are doing everything in their considerable power to reduce the cost of mortgages down as low as possible.

Nearly all of the articles I dig up are recent, and lack any real background. A few of them note that the rate was going to jump last year, when congress agreed to extend it for another year. None seem to mention what legislation it was that was to expire last year, that cut them in the first place. I'm guessing something stimulus related?

Note in particular the College Cost Reduction and Access Act of 2007, which reduced interest rates on Stafford Loans gradually to 3.4% in the 2011-2012 school year, only to snap back in the 2012-2013 school year. That's what set up this 'crisis'.

Having a look at our risk model, cost of funds info and loan spread hurdles, I'd put the average college borrower in a risk rating that requires a loan spread of around 3.7%. Cost of funds for 10-year money is about 1.3% at the moment, so 5% is a pretty reasonable number for this type of debt, imo. Floating on the 10-year with a spread of 3.5-4.5% is pretty reasonable. I'd suggest a cap of 6.8%

That's if the market were 100% private lenders. Since it's not and the non-dischargeable tag is applied to the debt, I'd suggest a federal subsidy for all students that covers interest for the duration of school, including graduate and doctoral programs.

The republican plan isn't an awful one, it needs a lower cap, though. The Warren plan is ludicrous.

Yep. We'd skin this cat a bit differently, but I am tracking with you.

Additionally, we need to own the fact that higher education is a public good and deal with the fact that the program will cost some tax dollars and then be wiped out by inflation. Student benefits will outstip the government costs and societal benefits will outweigh the tax/interest burden.

Also, I would love to refi at 4%. My undergrad loans were all 6.8% with the exception of one summer school loan. =/

IMO, it was a political stunt with a two pronged purpose: attracting attention to the student loan issue and taking a shot at the banks. It seems to have helped in the first issue, and I'm not sure what is a criteria for success/failure in the second. IMO, it's nice to see some attempts at messaging and public appeal, even if it means the proposed plan doesn't match a practical final implementation.

Can't complain about how much better the Republicans are at messaging and crap on Democrats for trying to do some themselves.

I think demanding that our higher education system, that benefits the economy greatly, be financed with debt from those least able to pay, the newest entrants to the economy, is ludicrous. If anything we are guaranteeing that those who are smart but also heavily indebted, will emigrate away from the United States in order to afford things like home-ownership and children. We are also tipping the equation against attending college for those who are capable but averse to the risk of taking on a lot of debt.

My two cousins, one with a masters in accounting and the other a law degree are in low six figure debt. The one with the law degree given the economic situation for lawyers is probably never going to pay it off successfully. Their younger brother is foregoing college, mainly because he believes, possibly correctly, that debt will keep him from serial entrepreneurship which is what he wants to do and that debt service is such a burden that it erases most of the gains of a college education.

The Warren bill is mostly about making the point that the government ought to be directly investing in education or that our society ought to borrow for it collectively, rather than requiring the younger generation to borrow individually for it. That and it is obscene that our government considered it so important to save sophisticated banks and well-connected crony capitalists that it lets them borrow for free to cover their reckless derivative trades, but requires future generations to finance their own education under profitable interest rates and serfdom-like terms.

College graduates earn more money over their careers, a lot more, and I believe that the current trajectory of debt and college cost is about government and big business squeezing down that difference for their own profit.

Education is not solely an individual good. It is a collective good and past generations benefited greatly from socializing the cost of higher education rather than pushing individual students into long-term debt peonage. The first car to drive across the bridge doesn't pay for the whole bridge so why are we doing this for college now?

We don't make soldiers buy their own weapons. We don't even make big multi-national companies pay for the navy that protects their assets on the seas, although perhaps we ought to.

The Warren bill is mostly about making the point that the government ought to be directly investing in education or that our society ought to borrow for it collectively, rather than requiring the younger generation to borrow individually for it. That and it is obscene that our government considered it so important to save sophisticated banks and well-connected crony capitalists that it lets them borrow for free to cover their reckless derivative trades, but requires future generations to finance their own education under profitable interest rates and serfdom-like terms.

The current and previous administration have been ball's out with their crony capitalism. It should come as no surprise that we continue to strip-mine the bottom 4 quintiles to hold the wealthiest among us aloft.

To add on to Facekhan's point, graduates with debt are living far below their means for the most part. I graduated with just around the average amount of debt from college just about a year ago. In that time, I've managed to get my debt down - but I've forgone living in a nice apartment, buying a new car, buying new luxury items (all things I could afford with my cashflow). Most of my fellow students are putting off getting married, buying that first house etc - all things that have significant contributions to the economy. I'm not the only one doing this, and it IS a significant drag on the economy. What's better - young college graduates spending their hard earned money on products and services in the community, or spending it on interest payments to loan companies?

I graduated grad school in 2009 with a small subsidized loan. I've been paying on it for four years. Are my payments going up if the rate goes up, or am I locked in?

If it is subsidized it's most like a Stafford Loan. The rates on those are fixed for the life of the loan barring a change in the law. The payment will only change if you select a different payment plan.

Normal loans need to have an interest rate significantly higher than the cost of the capital to account for the cost of servicing that loan and default risk. Though slightly lessened by generally not being dischargeable in bankruptcy, there is still a significant cost to collection and a risk of non-payment (can't get blood from a stone, or just poor financial management of the former student). Ergo student loans should be set to the cost of raising capital plus a slight premium for servicing costs (as in rate = prime + servicing fee) rather than manually set by congress. Politicians should not be meddling in those kinds of calculations.

How about we do something a little more radical and tie the loan to the 20 year treasury bond?The bond is essentially bought slightly below face value, pays you an interest payment every 6 months, and then returns the full face value at the end of the 20 year period. Since this is the structure the government will take to raise the capital for those student loans, why not have the recipient pay on the same schedule?

You effectively issue a 20 year bond when you pay for school. 6 months later you have a coupon payment due, but that is also roughly when you need to pay for the next semester, so that coupon payment could just be rolled into your next semester tuition bond. Not sure what I want to do about the first post-graduation coupon payment - might issue one more student-bond for that one. You now have a small payment (manageable for even recent grads) due every 6 months for 16 years, then need to start actually paying off your bonds semester by semester (by which time you should have easily been able to save up or be in a financial position to arrange further financing, not to mention 20 years of inflation eating away at the real cost).

If you think there is a strong probability of interest rates going down (or are confident of entering a well-compensated field like engineering), you could take it as a 10 year, or have expectations of higher rates in future (or taking a financially foolish course of study like art 'would you like fries with that' history), you could opt for the 30 year bond (which may also be popular for those pursuing advanced degrees - having only 10 years after your dissertation defense to start making big payments might be tough). Obviously this has a problem with addressing missed payments and deferrals, but I'm confident that those could be handled.

I still think the hoopla over 'oh woe is me, I have student loans' is grossly overblown.While some people were very foolish and took on excessive debt, the average debt load of a recent graduate is still under $27k. The median debt from attaining a bachelors at a public university is less than $8k. That is not enough to condemn them to perpetual poverty by any stretch of the imagination. Those who foolishly spent absurd amounts of money on private universities for prestige living will owe substantially more, but I have little sympathy with the 'everyone else should pay for my years indulging in my love of small overpriced liberal arts schools' crowd. Sure, it is nice at Oberlin College, but don't expect others to pay for it - there are just not that many positive externalities to you 'finding yourself' at an expensive college. /rant

Normal loans need to have an interest rate significantly higher than the cost of the capital to account for the cost of servicing that loan and default risk. Though slightly lessened by generally not being dischargeable in bankruptcy, there is still a significant cost to collection and a risk of non-payment (can't get blood from a stone, or just poor financial management of the former student).

The default risk varies a great deal from student to student. If we are going to treat student loans as a break-even commercial project that just happens to be housed in the federal government then the loans should be underwritten.

I graduated in 2006 and consolidated my loans with the Department of Educations direct loan program. My rate has stayed at six-point-something percent the entire time, so as far as I'm aware the rate reduction didn't affect existing balances.

Faramir mentioned earlier that the Gillibrand plan would allow existing loans to be refinances down to 4%, but as far as I'm aware that's the only plan that would alter the rate on existing loans.

there are just not that many positive externalities to you 'finding yourself' at an expensive college. /rant

The biggest positive benefit for going to a private school is to surround yourself with equally intelligent, motivated people. There are tons of good graduates from state schools in Wisconsin I've met through work. That said, I've generally been unimpressed by the majority of UW students I've met while attending a lecture or when I went to visit a friend in another college.

I definitely had to work harder to get a good grade in a class (and learned more) when I was in the middle of the pack and I didn't benefit much from curves. At a school like UW Milwaukee I would have been in the top of probably all my classes, and breezed through the material. I don't find that particularly attractive.

there are just not that many positive externalities to you 'finding yourself' at an expensive college. /rant

The biggest positive benefit for going to a private school is to surround yourself with equally intelligent, motivated people. There are tons of good graduates from state schools in Wisconsin I've met through work. That said, I've generally been unimpressed by the majority of UW students I've met while attending a lecture or when I went to visit a friend in another college.

I definitely had to work harder to get a good grade in a class (and learned more) when I was in the middle of the pack and I didn't benefit much from curves. At a school like UW Milwaukee I would have been in the top of probably all my classes, and breezed through the material. I don't find that particularly attractive.

That benefit is probably worth another 10k in debt or so.

Some private schools are great and some state schools are garbage.Some state schools are great and some private schools are garbage.It is more of a function of how good the school is, as well as the individual students.

Anecdotal reports from someone who attended both points to some classes at Anne Arundel Community College (near Annapolis MD) being better than those offered at George Washington University (they wouldn't accept the credit from a lesser institution as anything but electives, so she had to take some courses again, and the GW classes were of lesser academic rigor). There you have a community college being academically superior to an incredibly expensive private school (this was ~15 years ago, so your mileage may vary).

If the goal of higher education is actual education, attending community colleges for basic instruction, then transferring to a state university, can be very cheap and give you just as valuable of an education.

Then you get into the problem with individual students - a bad student attending an incredibly expensive school has no greater value to society than if they attended a party school, so why should taxpayers be on the hook for paying for the more expensive school?And the 'amenities bloat' where universities compete not on any kind of academic benefit but based on how many hot tubs their water facilities have and how nice their dorms are - there are many reasons why giving students blank checks backed by the taxpayer is a very bad idea.

Anyway, this has strayed a bit off-topic.Point being, I find no compelling reason why taxpayers should be subsidizing most higher education.I would be happier if we could even tweak rates based upon course of study, but underwriting is not politically palatable. Unfortunately that also opens the door to social engineering where some politician decides that some majors need to be promoted 'for the public good' (needless to say, I do not believe anyone in congress is capable of doing so objectively, even if predicting the needs of the future were within the ability of congresscritters).

Anyway, this has strayed a bit off-topic.Point being, I find no compelling reason why taxpayers should be subsidizing most higher education.I would be happier if we could even tweak rates based upon course of study, but underwriting is not politically palatable. Unfortunately that also opens the door to social engineering where some politician decides that some majors need to be promoted 'for the public good' (needless to say, I do not believe anyone in congress is capable of doing so objectively, even if predicting the needs of the future were within the ability of congresscritters).

Education is almost always a public good, and I have no trouble subsidizing it. My tax dollars spent on your basket weaving class have almost an infinitely higher level of utility than my tax dollars spent on the F-35 program.

I graduated in 2006 and consolidated my loans with the Department of Educations direct loan program. My rate has stayed at six-point-something percent the entire time, so as far as I'm aware the rate reduction didn't affect existing balances.

Faramir mentioned earlier that the Gillibrand plan would allow existing loans to be refinances down to 4%, but as far as I'm aware that's the only plan that would alter the rate on existing loans.

I'm under 2.5% and locked-in for the life of the loan. Yessssssssssss!

Education is almost always a public good, and I have no trouble subsidizing it. My tax dollars spent on your basket weaving class have almost an infinitely higher level of utility than my tax dollars spent on the F-35 program.

If the goal of higher education is actual education, attending community colleges for basic instruction, then transferring to a state university, can be very cheap and give you just as valuable of an education.

Right, for instance Wisconsin has a system of two year programs. Students from the two year schools can be accepted into any 4 year program if they get good grades. The tuition between the two year programs & additional four year schools is probably less than what I paid for in one year at my private school.

Why don't more people do this? Going to UW Madison is a steal compared to the cost of comparable private schools. Well, let's start out that the vast majority of people in those two year schools are there for a very good reason. They aren't motivated, aren't smart, and generally aren't the people I want to associate with. Personally, I'd get depressed from being forced to sit in classes far below my ability just to save a buck. (Honestly, I have the same opinion of alot of public four year state schools in my state) UW Oshkosh? What?

There is a big difference between being cheap and financially prudent in the process of getting an education. Going to community college is cheap and you're going to have a much harder time of it then someone less intelligent/hardworking who went to a better school. Being financially prudent means opting for the good state school instead of the dream private school. Living in a studio instead of that awesome apartment with a pool table and bar. Working during your summers instead of traveling around the world partying it up in nightclubs throughout Europe.

I graduated in 2006 and consolidated my loans with the Department of Educations direct loan program. My rate has stayed at six-point-something percent the entire time, so as far as I'm aware the rate reduction didn't affect existing balances.

Faramir mentioned earlier that the Gillibrand plan would allow existing loans to be refinances down to 4%, but as far as I'm aware that's the only plan that would alter the rate on existing loans.

I'm under 2.5% and locked-in for the life of the loan. Yessssssssssss!

I don't mind paying my 6.8% - given my loan balance is less than a year's wage, however, I am ticked about someone being on the other end of a nearly risk-free 6.8% investment with a government backstop.

I have been paying 7.7% forever it would seem. I did a consolidation a while back, but they told me by law they couldn't lower the rate...in fact they gave me a weighted average rate of the two loans I was consolidating. I went to school in the 90s...rates were much higher.

The government will no longer transfer it's guarantee during a private refinance, so that market has all but dried up. If you have some home equity and can roll it into a mortgage, the government is subsidizing the hell out of those rates.

Oregon may implement a system with students going to college with no money down but pay the cost through 3% of salary for 24 years.A while back I thought this would be a great idea if I had the seed money. A private company doing this could probably make a killing by selecting high earning potential students, paying for their degree and then collecting an increasing yearly payback as the person advances and makes more money.

Oregon may implement a system with students going to college with no money down but pay the cost through 3% of salary for 24 years.A while back I thought this would be a great idea if I had the seed money. A private company doing this could probably make a killing by selecting high earning potential students, paying for their degree and then collecting an increasing yearly payback as the person advances and makes more money.

I don't see something like that actually working.Someone who diligently powers through their courses, taking only the required classes minimizing costs, keeps to a modest standard of living, etc. paying the same 3% as someone who chose to live in grossly overpriced luxury dorms with gourmet meal plan, is fundamentally untenable (or is the state now going to mandate uniform standards of living for all students?). The moral hazard issue is too strong.You would have to tally up their debt upon graduation and set a rate based upon that. Then you get into issues of adjusting the rate for the expected earnings; ethnic and socioeconomic backgrounds would be politically untenable, so the program would be largely limited to major, but that would be likely to cause problems as well (the female dominated 'women's studies' majors being valued less than the male dominated engineering fields).If you set the same rate schedules for all graduates, the high earning fields would be unduly burdened while the less remunerative fields would be heavily subsidized (quite the opposite of what should be sought).

3% is ludicrously low - for the average graduate that pays for about 1 year of school (not even at a high-end school). How confident are you that you can look at a group of 17 year olds and determine who among them will be high earners sufficient to fund this program? How are you going to defend against accusations of discrimination in how you select those individuals?

10% is closer to a realistic percentage, but you are still taking a big risk. Add in the compensation for some earning below your expectations, and you will need to bump this up even more. Anyone who is seen as likely to be a high earner would have no problem getting a traditional loan, leaving you with those who sought an indulgent education with no practical application, further ramping up costs of this program. Pretty soon you are looking at what amounts to a very high income-tax rate (with all the distortions that causes). You are then going to run into compliance issues - I suppose you could require their tax returns and base the number off of that, but high earners would have a good incentive to shape their compensation to minimize cash value.

There are simply too many problems with structuring such a program.If you wanted to reduce the initial burden on recent graduates, you could adjust loans such that only token payments are required at first, with payments ramped up over time. If you think the problem is that the total burden is too high, then get the government to stop pushing tuition inflation: 'Everyone should go to college' mass subsidizing of any and all university programs at ever increasing rates pushes up the cost of tuition - stop that inflation spiral and tuition will fall back to reasonable levels.

Oregon may implement a system with students going to college with no money down but pay the cost through 3% of salary for 24 years.A while back I thought this would be a great idea if I had the seed money. A private company doing this could probably make a killing by selecting high earning potential students, paying for their degree and then collecting an increasing yearly payback as the person advances and makes more money.

I don't see something like that actually working.Someone who diligently powers through their courses, taking only the required classes minimizing costs, keeps to a modest standard of living, etc. paying the same 3% as someone who chose to live in grossly overpriced luxury dorms with gourmet meal plan, is fundamentally untenable (or is the state now going to mandate uniform standards of living for all students?). The moral hazard issue is too strong.You would have to tally up their debt upon graduation and set a rate based upon that. Then you get into issues of adjusting the rate for the expected earnings; ethnic and socioeconomic backgrounds would be politically untenable, so the program would be largely limited to major, but that would be likely to cause problems as well (the female dominated 'women's studies' majors being valued less than the male dominated engineering fields).

Why do you assume the funding pays for EVERYTHING a person does during their college years? It's for education - there is no money down for the degree. It's not a free ride to do whatever you want for 4 years.

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If you set the same rate schedules for all graduates, the high earning fields would be unduly burdened while the less remunerative fields would be heavily subsidized (quite the opposite of what should be sought).

High earners are less burdened by a fixed percentage payment schedule. They pay back more in actual dollars. This is same argument about progressive tax rates...

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3% is ludicrously low - for the average graduate that pays for about 1 year of school (not even at a high-end school). How confident are you that you can look at a group of 17 year olds and determine who among them will be high earners sufficient to fund this program? How are you going to defend against accusations of discrimination in how you select those individuals?

10% is closer to a realistic percentage, but you are still taking a big risk. Add in the compensation for some earning below your expectations, and you will need to bump this up even more. Anyone who is seen as likely to be a high earner would have no problem getting a traditional loan, leaving you with those who sought an indulgent education with no practical application, further ramping up costs of this program. Pretty soon you are looking at what amounts to a very high income-tax rate (with all the distortions that causes). You are then going to run into compliance issues - I suppose you could require their tax returns and base the number off of that, but high earners would have a good incentive to shape their compensation to minimize cash value.

For one thing, I never said what rate a private company should charge. It would likely have to be higher than 3% because the goal is to make money, unlike a state run program that is happy breaking even (if that!)

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There are simply too many problems with structuring such a program.If you wanted to reduce the initial burden on recent graduates, you could adjust loans such that only token payments are required at first, with payments ramped up over time. If you think the problem is that the total burden is too high, then get the government to stop pushing tuition inflation: 'Everyone should go to college' mass subsidizing of any and all university programs at ever increasing rates pushes up the cost of tuition - stop that inflation spiral and tuition will fall back to reasonable levels.

Why do you assume the funding pays for EVERYTHING a person does during their college years? It's for education - there is no money down for the degree. It's not a free ride to do whatever you want for 4 years.

So you expect people to take this program to pay for tuition and still take out student loans to pay for everything else? Even with a goal of 'student tax plus more loans', how do you deal with students taking different courses or, shockingly, attending different schools! Are all universities expected to charge the exact same tuition no matter what school or what major? Different students have different costs.

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High earners are less burdened by a fixed percentage payment schedule. They pay back more in actual dollars. This is same argument about progressive tax rates...

Then this is, in effect, penalizing people who pursue valuable education while heavily subsidizing those who waste their time (and taxpayer dollars) on low-value education. Incentives matter - you are essentially saying that we should use the taxpayer dollars to ensure we have fewer engineer and more people with degrees in the comparative ethnography of finger painting.

In order to compare this to progressive tax rates, this program would have to be mandatory (else those going into highly remunerative degrees will prefer a traditional loan). Debates about the merits of progressive taxation are for another thread, so I won't go into that here.

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For one thing, I never said what rate a private company should charge. It would likely have to be higher than 3% because the goal is to make money, unlike a state run program that is happy breaking even (if that!)

3% is the rate from the program you posted, I wasn't even considering the costs to a private company. My point was that even 3% is substantially below break-even, such that the state would need something closer to 10%. This objection reads to me like the people condemning payday lenders charging incredible high rates of interest; even nonprofits trying to offer inexpensive sources of short-term finance found that they had to charge very similar rates to break even (no 'evil capitalists exploiting people!' narrative needed, it just cost that much to provide the service and the financing).

I chose 10% as a simple round number shoot from the hip guestimate - it would far more work than I am willing to put in to evaluate the financing costs, administration costs, effects on student enrolment (what is the effect on the number of low-value degrees taken, changing average graduate earnings), delinquency rates, public policy effects, increase in the utilization of welfare services as more people choose low-paid professions, or all the rest of the variable that would go into a proper evaluation. That notwithstanding, 10% is a far more realistic number than 3%.

The 2012 median earnings of those with bachelors is $1,066 per week*, for an annual earnings of $55,432 (yes I know average would be the appropriate number here, but I don't have that number handy) while the average cost of university was $32,617* for the 2010-11 school year. You want to pay an average cost of $130k (obviously taking sticker price for school, which many do not pay anyway, but claiming 'it will cost the state less because the state will give them free money' seems a bit inappropriate), while 3% of earnings ($1663) over 24 years (presuming wages keep pace with inflation, thus avoiding the need to compensate for inflationary effects) only yields $39,911 (while this doesn't account for those who go on to higher education, it also doesn't account for those who are not in the workforce, so I'm going to simplify things by calling those a wash).

The 'pay it forward, pay it back' theory has this working in a similar way to social security with former graduates paying for current students - presuming 24 years of workers paying for 4 years of workers, you still need at least $5,435 per worker per year (9.8% - pretty close to my 10% guestimate eh?) just to meet the needs of students under the assumption that there is no population growth and no increase in the cost of education (beyond inflation). I hope I do not need to point out how unusual it would be to think the student population would never grow and that the cost of school will likewise stagnate. Add on to that the 23 years of massive taxpayer payments before you get the full complement of 24 years worth of graduates as workers.

Let us take as a given that this is just back of the envelope look while wrapping up and running out the door for the holiday, so please forgive the slapdash nature. I fully admit that the average earnings could be so phenomenally above the median that it invalidates my point, but I find that unlikely.

Why do you assume the funding pays for EVERYTHING a person does during their college years? It's for education - there is no money down for the degree. It's not a free ride to do whatever you want for 4 years.

So you expect people to take this program to pay for tuition and still take out student loans to pay for everything else? Even with a goal of 'student tax plus more loans', how do you deal with students taking different courses or, shockingly, attending different schools! Are all universities expected to charge the exact same tuition no matter what school or what major? Different students have different costs.

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High earners are less burdened by a fixed percentage payment schedule. They pay back more in actual dollars. This is same argument about progressive tax rates...

Then this is, in effect, penalizing people who pursue valuable education while heavily subsidizing those who waste their time (and taxpayer dollars) on low-value education. Incentives matter - you are essentially saying that we should use the taxpayer dollars to ensure we have fewer engineer and more people with degrees in the comparative ethnography of finger painting.

In order to compare this to progressive tax rates, this program would have to be mandatory (else those going into highly remunerative degrees will prefer a traditional loan). Debates about the merits of progressive taxation are for another thread, so I won't go into that here.

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For one thing, I never said what rate a private company should charge. It would likely have to be higher than 3% because the goal is to make money, unlike a state run program that is happy breaking even (if that!)

3% is the rate from the program you posted, I wasn't even considering the costs to a private company. My point was that even 3% is substantially below break-even, such that the state would need something closer to 10%. This objection reads to me like the people condemning payday lenders charging incredible high rates of interest; even nonprofits trying to offer inexpensive sources of short-term finance found that they had to charge very similar rates to break even (no 'evil capitalists exploiting people!' narrative needed, it just cost that much to provide the service and the financing).

I chose 10% as a simple round number shoot from the hip guestimate - it would far more work than I am willing to put in to evaluate the financing costs, administration costs, effects on student enrolment (what is the effect on the number of low-value degrees taken, changing average graduate earnings), delinquency rates, public policy effects, increase in the utilization of welfare services as more people choose low-paid professions, or all the rest of the variable that would go into a proper evaluation. That notwithstanding, 10% is a far more realistic number than 3%.

The 2012 median earnings of those with bachelors is $1,066 per week*, for an annual earnings of $55,432 (yes I know average would be the appropriate number here, but I don't have that number handy) while the average cost of university was $32,617* for the 2010-11 school year. You want to pay an average cost of $130k (obviously taking sticker price for school, which many do not pay anyway, but claiming 'it will cost the state less because the state will give them free money' seems a bit inappropriate), while 3% of earnings ($1663) over 24 years (presuming wages keep pace with inflation, thus avoiding the need to compensate for inflationary effects) only yields $39,911 (while this doesn't account for those who go on to higher education, it also doesn't account for those who are not in the workforce, so I'm going to simplify things by calling those a wash).

The 'pay it forward, pay it back' theory has this working in a similar way to social security with former graduates paying for current students - presuming 24 years of workers paying for 4 years of workers, you still need at least $5,435 per worker per year (9.8% - pretty close to my 10% guestimate eh?) just to meet the needs of students under the assumption that there is no population growth and no increase in the cost of education (beyond inflation). I hope I do not need to point out how unusual it would be to think the student population would never grow and that the cost of school will likewise stagnate. Add on to that the 23 years of massive taxpayer payments before you get the full complement of 24 years worth of graduates as workers.

Let us take as a given that this is just back of the envelope look while wrapping up and running out the door for the holiday, so please forgive the slapdash nature. I fully admit that the average earnings could be so phenomenally above the median that it invalidates my point, but I find that unlikely.

Please go back and reread what I wrote. I never advocated for a state run program. Your basic assumptions about what you think to be arguing with me are flawed.

Please go back and reread what I wrote. I never advocated for a state run program. Your basic assumptions about what you think to be arguing with me are flawed.

You linked to a state run program in Oregon (it in a 'hey everyone, look at this' manner). Given that this thread is roughly themed upon the government student loan programs, discussing alternative proposals for a government student loan program is quite relevant to the thread (especially one already referenced).

Any private program doing such will be fraught with the same issues along with increased rates of delinquency (likely legal difficulties with enforcing the contract), difficulty with enforcement and monitoring (I suppose you could take a one year lag and demand to see their tax return, which is another can of worms), serious selection bias (primarily attractive to those expecting to have below-average incomes after graduation) and moral hazard issues (drastically lowered the cost of spending time 'finding oneself', living a bohemian lifestyle, taking non-cash compensation, etc). I have heard no suggestion of how these problems would be overcome, much less even the simple problem of the massive opportunity costs of such an investment.